Dodd-Frank has attempted to create an entirely new world of transparency and accountability for directors of publicly traded companies. For many boards, implementing the new rules is likely to be a true sea change; it will require major changes in both attitudes and behaviors. But fortunate companies, like JetBlue and P.F. Chang’s, that historically have been more transparent about executive compensation, are finding that compliance with the new regulations is not so onerous.
Ann Rhoades
Implementation of Dodd-Frank will be difficult at those companies where boards have been reluctant to delineate details on the composition of executive compensation with employees and shareholders, for whatever reason. It is also about holding directors more accountable for their own actions and for the behavior of senior executives.
Of note, for example, is one incident recently that put the case for Dodd-Frank rules in stark relief. The Wall Street Journal reported that millions of dollars would be added to an executive’s pay to compensate him for giving up the corporate jet for personal use, which will soon be subject to public disclosure. Nothing about this appeared to have anything to do with compensating the CEO for the performance of the company—it was merely about the optics of him converting company assets to personal use, a distressingly common behavior.
Dodd-Frank attempts to prevent these types of excessive executive behaviors that add nothing to shareholder value. This is a laudable goal and one that I believe directors will find mostly beneficial for their companies, especially in terms of performance. Yes, shareholders will have more input on compensation packages, especially in regard to concepts such as “say on pay,” the one- to three-year window and golden parachutes. But having some limitations on executive pay may actually force companies to be creative in compensation, basing it more on performance measures that shareholders can understand. Many CEOs have gotten used to extraordinarily generous packages that include perks that are simply no longer going to be available and directors, particularly those on the compensation committee, will need to learn to design benefits packages that will enhance performance, are accountable to shareholders and yet are attractive and competitive for executives.
The best metrics are simple to understand, few in number and focused on the most important indicators of corporate success for the company.
Fortunately, it has been shown, fairly convincingly, that greater accountability is a corporate value that can also lead to greater profitability. For example, at P.F. Chang’s, if executives don’t achieve specified goals, they know that it will be directly reflected in their bonuses. It’s just as simple as that. At P.F. Chang’s, we don’t anticipate that say on pay will be a problem to implement. Like some other companies, a culture has been built on the communication of shared values and transparency. Therefore, shareholders probably feel more confident that compensation and bonuses are directly based on performance. In organizations such as these, boards hold everyone (including themselves) accountable for living the values, and thus Dodd-Frank is not an overwhelming issue.
At JetBlue, as well, we’ve historically published both goals and dashboard metrics for the company and top executives’ performance in relation to those goals. Because of that, when compensation and bonuses are paid, there are no surprises. Executive compensation at JetBlue is tied to performance metrics—and as a result, during the last shareholders’ meeting there was not a single comment by a shareholder on issues related to executive pay. I believe we make the connection to performance clear for shareholders and others by being transparent regarding total rewards.
And who can argue with the results of either of these companies? JetBlue is one of the only airlines that remained profitable during the recession and P.F. Chang’s has posted increased revenue for many years, even in 2009, when Chairman Rick Federico said in the annual report that he had expected a 20-percent loss. Both P.F. Chang’s and JetBlue are examples of organizations where the behaviors of top executives reflect the values of the organization and, I believe, the outcomes of the company as a whole.
Knowing that shareholders will now have a specific vote on things like golden parachutes is likely to make them problematic after Dodd-Frank is fully implemented. Unacceptably high, above-market pay packages for new CEOs will also probably not be as typical anymore, nor will the immediate vesting of pensions for C-suite players. Dodd-Frank rules on salary multiples will be hard to implement even at Jet- Blue and P.F. Chang’s, but perhaps not as difficult as at many other companies where executive compensation has moved far from reality.
What makes these companies so different from the norm? In my opinion, it is quite simple: the companies that will have the easiest time with Dodd-Frank are those where the corporate culture rewards the directors and executives for placing the welfare of the company and its employees above personal profit. Dodd-Frank calls for public companies to tie bonuses to goals that were published prior to year-end; no longer will the criteria for executive bonuses be an unknown.
In my book, Built on Values: Creating an Enviable Culture that Outperforms the Competition, we demonstrate that one of the keys to building a values-based culture is making performance metrics available to all employees at the beginning of each fiscal year. Leaders have access to a dizzying supply of metrics. Directors can exert influence by insisting that metrics be totally transparent to shareholders and employees. The best metrics are simple to understand, few in number and focused on the most important indicators of corporate success for the company. And it is absolutely amazing how CEO compensation, particularly bonuses, is perceived as fair when directly tied to accurate and measurable performance metrics.
Too many leaders, though, feel that tying compensation to goals and values is a low priority, especially when compared to running the business day-to-day. My colleagues in values-rich companies would respectfully disagree. “The best companies—those with clearly articulated values and a sense of direction—have a constant sense of urgency but they’re not frantic and under enormous stress,” observed Joel Peterson, chairman of the board of JetBlue and the former CEO of Trammell Crow, in Built on Values.
Dodd-Frank became politically viable because of the failure of corporate governance to rein in companies who took massive losses and still managed to find a way to justify huge payouts for executives. In other words, a lot of Dodd-Frank is aimed at encouraging honesty with shareholders. Shareholders, particularly institutional ones, are likely to applaud that and reward early cooperators with additional investment.
Directors and CEOs who resist these changes are likely to find themselves challenged by activist shareholders. Despite the work and change of heart involved on the part of executives, it will almost surely be easier to simply adopt transparency and accountability as new values. At the end of the day, Dodd-Frank is all about accountability; a bonus is that it will make it less difficult for boards to refuse outrageous demands.
Ann Rhoades is chairman of the board compensation committees at JetBlue and P.F. Chang’s. She is also president of People Ink (www.peopleink.com), a culture-change consulting firm and author of Built on Values: Creating an Enviable Culture that Outperforms the Competition (Jossey-Bass, 2011).